New Jersey Enterpreneur - Small Business, Entrepreneurs and Venture Capital

Introduction
SBIR is the federal government's principal R&D Grants program targeted to small science and technology based businesses. It is unarguably the best source of risk capital for developing promising new technologies and is probably the closest thing to the entrepreneurs Holy Grail of "free" money. Even more significant is that it can serve entrepreneurs as a pathway to equity financing.

Federal agencies with external R&D budgets in excess of $100 million must earmark 2.5% of these funds for competitive grants to small companies. There are presently 11 participating agencies with a total of more than $2 billion available for SBIR annually. Agencies include:

• Dept. of Agriculture
• Dept. of Commerce
• Dept. of Defense
• Dept. of Education
• Dept. of Energy
• Dept. of Health and Human Services (NIH,CDC, FDA)
• Dept. of Homeland Security
• Dept. of Transportation
• Environmental Protection Agency
• NASA
• National Science Foundation

Participating agencies publish one or more SBIR solicitations per year. The solicitation is essentially a grocery list of topics and areas where they are interested in sponsoring research. In the case of some agencies such as the Departments of Defense and Homeland Security the topics are very specific. These agencies have some very real, specific and immediate problems that they need your help in solving. At the other end of the specificity spectrum, the National Institutes of Health (NIH) and Department of Agriculture publish broader categories of interest. Beyond those categories, NIH will entertain any proposal related to improving the nation’s health and is the only SBIR agency to consider unsolicited proposals.

Companies that think they have a technology that will address an agency’s problem or interests can develop and submit a Phase I proposal. Proposals are evaluated competitively and awards are made based upon relative merit. Emphasis is placed on technologies that both address the sponsoring agency's interest and also have commercial applications.

Eligibility

To be eligible to participate, a company must be 51% owned and controlled by individuals who are U.S. citizens or permanent resident aliens. It must also be a small business with no more than 500 employees including affiliates. All Phase I and Phase II work must be performed in the U.S.

There is some flexibility for new entrepreneurs in that individuals can submit proposals. An applicant does not have to have a company in place to submit a successful proposal. However, a company must be in place to receive an award.

Three Phase Program
There are three phases to SBIR. The purpose of Phase I is to demonstrate the technical, scientific and increasingly commercial merit and feasibility of the proposed technology. Phase I grant awards vary in size by agency. They are typically up to $100,000 and sometimes more.

Upon successful completion of Phase I, companies can apply for Phase II. In some cases companies must be specifically invited to apply for Phase II. Awards are made based upon the results and potential of the Phase I work and the sponsoring agency's interest in the developing technology.

Phase II supports the main R&D effort and may include the development of a prototype. Phase II awards also vary by agency. They are typically up to $750,000 and sometimes more. The government is placing increasing emphasis on the commercialization of Phase II technologies and agencies now require the submission of a commercialization plan as part of the Phase II proposal.

One of the frustrations of working with the government is that each agency may do the same thing somewhat differently than other agencies. This is characteristic of SBIR where there are essentially 11 different SBIR programs rather than a single uniform program.

The chances of Phase I funding generally range between 1 in 6 and 1 in 8. These chances increase significantly for Phase II to approximately 2 in 5. In combination, Phases I and II provide substantial risk capital for developing a new technology. Beyond the immediate value of a much needed cash fusion, however, the real underlying value of the SBIR program is that it can serve as a pathway to equity financing to help support technology commercialization activities.

Entrepreneurs face the temptation of focusing too narrowly and almost exclusively on the development of their technology during the SBIR contract period. If, however, they simultaneously give attention to removing as much market and business risk from their venture as possible, particularly during Phase II, they can reach the point where they can begin to get on the radar screens of prospective equity investors and commercialization partners.

Phase III is commercialization. Companies that successfully complete Phases I and II are expected to commercialize their technology. There are, however, no additional cash awards for Phase III. Companies are generally expected by that point to be able to raise the funding they need privately or through a government customer.

Participating small businesses typically retain the worldwide patent rights to any new technology. The sponsoring agency receives a royalty-free license, reserves the right to require the patent holder to license others under certain circumstances, and generally requires that the commercialized technology be manufactured in the US.

The SBIR program is faculty unfriendly. Although university collaborations are allowed and encouraged, a full time faculty member cannot serve as a project’s principal investigator (PI). The PI must be employed more than 50% of their time by the small business during the project period and cannot work full time for another organization.

SMALL BUSINESS TECHNOLOGY TRANSFER PROGRAM (STTR)

The Small Business Technology Transfer Act of 1992 established the Small Business Technology Transfer (STTR) Pilot Program to supplement SBIR. STTR is essentially the younger, poorer sister of the SBIR program. Only the five federal agencies with the largest external R&D budgets in excess of $1 billion participate including: Defense, Energy, Health and Human Services, NASA, and the National Science Foundation. New for FY 2006 the Department of Homeland Security has become an STTR agency. Total funding for the STTR program is approximately 10% of the funding available under SBIR.

The objective of STTR is to stimulate the transfer of technology from research institutions to the marketplace via cooperative research. The intent was that small companies would commercialize promising ideas that originated in universities and other non-profit institutions. The reality thus far has been that a majority of projects have focused on co-development of the small company’s technology.

SBIR and STTR are structurally similar with three Phases and the same award levels. The primary differentiator of STTR is that at least 30% of the research is to be conducted by a non-profit research institution in collaboration with the small business. In addition, in the case of NIH and NASA, the principal investigator of a project is not required be employed by the small business more than half- time. This makes it easier for college faculty to participate.

SBIRWORLD.COM

The National Science Foundation sponsors a comprehensive web site through which entrepreneurs can access the agency solicitation schedule. It also offers links to all the agencies’ web sites so that entrepreneurs can access their solicitations, which include proposal writing instructions. In addition to helpful information and links, the site offers a particularly useful Search feature. Entrepreneurs are able to search current, as well as past, SBIR and STTR solicitations for topics related to their technologies and core technical competencies.

Below and to the left of the horizontal menu bar on the homepage you will see an elliptically shaped button that says Search. Clicking it will lead you into three forms. Ignore the first form. The second form will allow you to Search Open SBIR/STTR Solicitation Topics. These are solicitations and topics to which you can respond today. You enter a search term and can specify any or all agencies. You can search SBIR, STTR or both. I would recommend beginning with a broad search and then narrowing it as needed.

The third form allows you to "Search Historical Database of Closed Solicitations." It is comprised of SBIR and STTR topics that you can no longer respond to, but could have in the past had you known about them. This database can help you identify research areas and topics related to your strategic interests that the agencies have been interested in previously and which might be of interest to them in the future. If you identify a topic that could have been a fit, you can make a note to check that agency’s next solicitation when it is released.

It is hard for the typical cash strapped entrepreneur to resist the seductive allure of nearly "free" money. It is analogous to the Sirens’ song in Greek mythology. Remember that the government is typically not interested in your technology unless it is consistent with their priority interests or solves one of their pressing problems. Entrepreneurs are sometimes tempted to act like Cinderella’s ugly stepsisters. They may try to fit the "big feet" of their technology into a "glass slipper" topic that it was not intended for.

Make sure that your technology is a good fit with any identified topic before deciding to write a proposal. Attempt to confirm the fit with the sponsoring agency before you get started. You also want to make sure that a topic is consistent with your business strategy and goals.

 www.sbirworld.com

Randy Harmon is a technology commercialization consultant with the NJ Small Business Development Centers of Rutgers Business School. He is also co-founder of Foundations Business Development Group, LLC. He serves as a coach to the CEOs of startup and early stage businesses helping them grow to the point where they can hire their own management team. He also helps entrepreneurs compete for Federal SBIR/STTR R&D grants and then commercialize their grant developed technology.